Accounting Concepts and Principles

- are a set of logical ideas and procedures that guide the accountant in recording and
communicating economic information. They provide a general frame of reference by which
accounting practice can be evaluated and they serve as guide in the development of new
practices and procedures
Basic Accounting Concepts
1. Separate Entity Concept regards the business enterprise as separate and distinct from its
owners and from other business enterprises. Only the transactions of the business are
recorded in the books of accounts. The personal transactions of the business owner(s) are
not recorded.
2. Going Concern Assumption is a concept which assumes that the business enterprise will
continue to operate indefinitely.
3. Time Period Principle also known as Periodicity or Reporting Period concept, is the
concept behind providing financial accounting information about the economic activities
of an enterprise for specified time periods. For reporting purposes, one year is usually
considered as one accounting period. Users need timely periodic information to help them
make economic decisions (e.g. Business owners tracking the most and least sold products).
An accounting period that is shorter than 12 months is called an “interim period” which
can be a month, a quarter (3 months) or a semi-annual period (6 months)
a. Calendar Year – a twelve-month period that starts on January 1 and ends on
December 31
b. Fiscal Year – a twelve-month period that starts on any month of the year other
than January and ends twelve months after the starting period.
4. Monetary Unit Principle. Under this concept, assets, liabilities, equity, income and
expenses are stated in terms of a common unit of measure, which is the peso in the
Philippines.
5. Objectivity Principle states that all business transactions that will be entered in the
accounting records must be duly supported by verifiable evidence.
6. Historical Cost Concept means that all properties and services acquired by the business
must be recorded at their original acquisition cost.
7. Accrual Accounting Principle states that economic events are recorded in the period in
which they occur rather than at the point in time when they affect cash. Thus, income is
recorded in the period when it is earned such as when goods are delivered or when services
have been rendered, rather than when it is collected.
8. Matching Principle. Under this concept, some costs are initially recorded as assets and
charged as expenses only when the related revenue is recognized (e.g. supplies are
considered an asset at first and is considered as expense when they are used for revenue)
9. Full Disclosure Principle states that all material facts that will significantly affect the
financial statements must be indicated.
10. Conservatism/ Prudence Principle is a policy of anticipating possible future losses but
not future gains. This policy tends to understate rather than overstate net assets and net
 income, and therefore lead companies to "play safe". This is necessary so that assets or
income are not overstated and liabilities or expenses are not understated. You need to be
keen and prudent in recording your transactions, if one part is missing then all parts would
be affected.
11. Materiality Concept means that financial reporting is only concerned with information
significant enough to affect decisions (e.g. items like paperclips can be listed of as expenses
immediately).
12. Consistency Concept means that approaches used in reporting must be uniformly
employed from period to period to allow comparison of results between time periods.
Accounting policies, however, can be changed.

Accounting Equation
Assets = Liability + Equity
Liabilities = Assets – Equity
Equity = Assets - Liabilities
 Assets – are the economic resources you control that have resulted from past events
and can provide you with economic benefits.
 Liabilities – are your present obligations that have resulted from past events and can
require you to give up economic resources when settling them.
 Equity – is simply assets minus liabilities. Other terms for equity are “capital”, “net
assets”, and “net worth”.
a. Control is the right over the economic benefits that the resource may produce. Control means
you have the exclusive right to enjoy those benefits and the ability to prevent others from
enjoying those benefits.
b. The control over an economic resource has resulted from a past event or transaction.
Resources for which control is yet to be obtained in the future do not qualify as assets in the
present.
c. The economic resource must have the potential to provide you with economic benefits in at
least one circumstance.
 Sold, leased, transferred, or exchanged for other assets;
 Used singly or in combination with other assets to produce goods or provide services;
 Used to enhance the value of other assets;
 Used to promote efficiency and cost savings; and
 Used to settle a liability
d. Obligation means a duty or responsibility.
 Legal obligation – an obligation that results from a contract, legislation, or other
operation of law; or
 Constructive obligation – an obligation that results from your past actions (e.g. past
practice or published policies)
 e. Income/Revenue – are increases in economic benefits during the period in the form of
increase in assets, or decreases in liabilities, that result in increases in equity.
f. Expenses – are decreases in economic benefits during the period in the form of decreases in
assets, or increases in liabilities, that result in decreases in equity
g. If income is greater than expenses, the difference is profit
h. If income is less than expenses, the difference is loss

Forms of Business Organization

1. Sole Proprietorship - A form of business is owned by one person; the simplest, and the
most common form of business organization. The business and the owner are inseparable
2. Partnership - A form of business owned by two or more persons. The details of the
arrangement between the partners are outlined in a written document called articles of
partnership. Profits are divided among partners based on their agreed sharing. The owner
is called a partner.
3. Corporation - A corporation is a business organized as a separate legal entity (artificial
person) under the corporation law with ownership divided into transferable shares of stocks
 Emphasize that it is the law (Corporation Code of the Philippines) that creates a
corporation.
 The corporation begins its existence from the date the Articles of Incorporation is
approved by the Securities and Exchange Commission (SEC)
 The SEC (Securities and Exchange Commission) is the government agency
primarily tasked to regulate private corporations in the Philippines.
 The owners are called stockholders or shareholders.
 The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
 The voting rights of a shareholder is generally based on the percentage of
ownership.
 The management of the business is delegated by the shareholders to the Board of
Directors
 The ownership is divided into shares and the value of one share may be
denominated at a smaller amount.
 The proof of ownership is evidenced by a stock certificate.
4. Cooperative - A cooperative is a duly registered association of persons with a common
bond of interest, voluntarily joining together to achieve their social, economic and cultural
needs.
 The owners are called members who contribute equitably to the capital of the
cooperative.
 The members are expected to patronize their products and services.
 The word ‘cooperative’ appears in the name of the entity.
 This form of business organization is regulated by the Cooperative Development
Authority (CDA).
 Republic of the Philippines Congress of the Philippines: Republic Act No. 6939
Types of Major Accounts
The Account
Account is the basic storage of information in accounting. It is a record of the increases and
decreases in a specific item of asset, liability, equity, income or expense.
An account may be depicted through a “T-account.” A T-account is called as such because it
resembles the letter “T”.
1. Account title – describes the specific item of asset, liability, equity, income or expense.
2. Debit side – the left side of the account
3. Credit side – the right side of the account
The Five Major Accounts
1. Assets – are the economic resources you control that have resulted from past events and
can provide you with future economic benefits.
2. Liabilities – are your present obligations that have resulted from past events and can
require you to give up resources when settling them.
3. Equity – is assets minus liabilities.
4. Income – is increases in economic benefits during the period in the form of increases in
assets, or decreases in liabilities, that result in increases in equity, excluding those relating
to investments by the business owner.
 Revenue arises in the course of the ordinary activities of a business, e.g. sales and
service fees.
 Gains represent other items that meet the definition of income and may or may not
arise in the course of the ordinary activities of an entity.
5. Expenses – are decreases in economic benefits during the period in the form of decreases
in assets, or increases in liabilities, that result in decreases in equity, excluding those
relating to distributions to the business owner.
 Expenses arise in the course of the ordinary activities of the business.
 Losses represent other items that meet the definition of expenses and may or may not
arise in the course of the ordinary activities of the entity.
Classification of the Five Major Accounts
Balance Sheet Accounts Income Statement Accounts
1. Assets 4. Income
2. Liabilities 5. Expenses
3. Equity

The Balance Sheet (or the Statement of Financial Position) is one of the components of a
complete set of financial statements. The Balance Sheet shows the financial position of a business.
The Income Statement (or the Statement of Profit or Loss) is a sub-component of the Statement
of Comprehensive Income, which is also one of the components of a complete set of financial
statements. The income statement shows the profit or loss of a business.
A chart of accounts is a list of all the accounts used by a business.
Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and
retrieval of information.
a. The first digit in the 3-digit number refers to the major types of accounts:
Major Types of Accounts Assigned Number
Assets 1
Liabilities 2
Equity 3
Income 4
Expenses 5

b. The second digit in the 3-digit numbering refers to the account titles and the
sequence on how they are listed in the chart of accounts
c. The third digit in the 3-digit numbering, if not zero, signifies that the account
is a contra account or an adjunct account to a related account.
Common Account Titles
Balance Sheet Accounts
Assets
 Cash – includes money or its equivalent that is readily available for unrestricted use,
e.g., cash on hand and cash in bank
 Accounts receivable – collectibles supported by oral or informal promises to pay
 Allowance for bad debts – the aggregate amount of estimated losses from uncollectible
accounts receivable. Another term is “allowance for doubtful accounts.”
 Notes receivable – collectibles supported by written or formal promises to pay in the
form of promissory notes
 Inventory – represents the goods that are held for sale by a business. For a manufacturing
business, inventory also includes goods undergoing the process of production and raw
materials that will be consumed in the production process
 Prepaid Supplies – represents the cost of unused office and other supplies
 Prepaid Rent – rent paid in advance
 Prepaid Insurance – cost of insurance paid in advance
 Land – the lot on which the building of the business has been constructed or a vacant lot
which is used as future plant site. Land is not depreciable.
 Building – the structure owned by a business for use in its operations
  Accumulated depreciation – building – the total amount of depreciation expenses
recognized since the building was acquired and made available for use.
 Equipment – consists of various assets such as:
a. Machineries and other factory equipment
b. Transportation equipment, e.g. vehicles, delivery trucks
c. Office equipment, e.g. desks, cabinets, chairs
d. Computer equipment, e.g. server, personal computers and laptops
e. Furniture and fixtures, e.g. desks, cabinets, movable partitions
 Accumulated depreciation – equipment – the total amount of depreciation expenses
recognized since the equipment was acquired and made available for use.
Liabilities
 Accounts payable – obligations supported by oral or informal promises to pay by the
debtor.
 Notes payable – obligations supported by written or formal promises to pay by the debtor
in the form of promissory notes.
 Interest payable – interest incurred but not yet paid. Interest payable arises from interest
and bearing liabilities. For example, you will incur interest on your bank loan.
 Salaries payable – salaries already earned by employees but not yet paid by the business
 Utilities payable – utilities (e.g. electricity, water, telephone, internet, cable TV, etc.)
already used but not yet paid
 Unearned income – items related to income that were collected in advance before they
are earned. After the earning process is completed, these items are transferred to income.
Equity (Capital, Net Assets/Net Worth)
 Owner’s capital/ Owner’s equity – the residual amount after deducting liabilities from
assets
Increased By Decreased By
Investments or contributions by the owner Withdrawals or distributions to the owner
Income or Profit earned by the business Expenses or Loss incurred by the business

 Owner’s drawings – This account is used to record the temporary withdrawals of the
owner during the period. At the end of the accounting period, any balance in this account
is closed to the “Owner’s capital” account.
Income Statement Accounts
Income
 Service Fees - revenues earned from rendering services (e.g. services of a spa, services of
a beauty salon, etc.)
 Sales - revenues earned from the sale of goods (e.g. sale of barbecue, sale of souvenir
items, etc.)
  Interest Income - revenues earned from the issuance of interest-bearing receivables
 Gains - income earned from the sale of assets (except inventory) or from enhancements of
assets or decreases in liabilities that are not classified as revenue.
Expenses
 Cost of sales/ Cost of goods sold – represents the value of inventories that have been sold during
the accounting period.
 Freight-out – represents the seller’s costs of delivering goods to customers. Other terms for
freight-out are “delivery expense”, “transportation-out”, and “carriage outwards.”
 Salaries expense – represents the salaries earned by employees for the services they have
rendered during the accounting period.
 Rent expense – represents the rentals that have been used up during the accounting period.

 Utilities expense – represents the cost of utilities (e.g. electricity, water, telephone, internet, cable
TV, etc.) that have been used during the accounting period. A business can also have separate
accounts for each type of utility, e.g. “Electricity expense”, “Water expense”, “Technology and
Communication expense”, and the like.
 Supplies expense – represents the cost of supplies that have been used during the period.
 Bad debts expense – the amount of estimated losses from uncollectible accounts receivable
during the period. Other term is “doubtful accounts expense.”
 Depreciation expense – the portion of the cost of a depreciable asset (e.g. building or equipment)
that has been allocated to the current accounting period.
 Advertising expense – represents the cost of promotional or marketing activities during the
period
 Insurance expense – represents the cost of insurance pertaining to the current accounting period.
 Taxes and licenses – represents the cost of business and local taxes required by the government
for the conduct of business (e.g. mayor’s permit, other percentage taxes, community taxes). For
corporations and partnerships, income taxes are recorded in a separate account called “Income tax
expense.”

 Transportation and travel expense

a. Transportation expenses represent the necessary and ordinary cost of employees
getting from one workplace to another which are reimbursable by the business, e.g.
reimbursable taxi fares of employees running some errands and those who are
working on late shifts
b. Travel expenses represent the costs incurred when travelling on business trips, e.g.
out-of-town travel costs of employees sent to seminars.
 Interest expense – represents the cost of borrowing money. It is the price that a lender charges a
borrower for the use of the lender’s money. Other terms for interest expense are finance costs and
borrowing costs.
 Miscellaneous expense – represents various small expenditures which do not warrant separate
presentation.
 Losses – expenses which may or may not arise from the ordinary course of business activities.
Losses may arise from:
a. Sale of assets, other than inventory, at a sale price that is less than the carrying amount;
b. Decreases in the value of assets due to destruction, damage, obsolescence and other changes in
values caused by external environmental factors, e.g. loss on fire, earthquake, storm, and other
calamities, decrease in the value of foreign currencies held due to changes in exchange rates.
Notes
o The term “earned” relates to income, while the term “incurred” relates to expenses.
o The “unused” portion of a cost is an asset, while the “used” portion is an expense. For example,
the cost of unused office supplies is an asset (prepaid supplies), while the cost of office supplies
used during the period is expense (supplies expense).

Users of Accounting Information

A. Internal Users - Internal users of accounting information are those individuals inside a
company who plan, organize, and run the business. These users are directly involved in
managing and operating the business. Accounting information is presented to internal users
usually in the form of management accounts, budgets, forecasts and financial statements.
 Management
a. Information need: Income/earnings for the period, sales, available cash,
production cost
b. Decisions supported: Analyze the organization's performance and position
and take appropriate measures to improve the company results. sufficiency
of cash to pay dividends to stockholders; pricing decisions
 Employees
a. Information need: Profit for the period, salaries paid to employees
b. Decisions supported: Job security, consider staying in the employ of the
company or look for other employment opportunities.
 Owners
a. Information need: Profit or income for the period, resources or assets of the
business, liabilities of the business
 b. Decisions supported: Considerations regarding additional investment,
expanding the business, borrowing funds to support any expansion plans.
Category Decisions to Make Information Needed
Owners Decide the goals of the All types of financial
business based on its statements, audited
profitability and longevity
statements, income tax
Managers Decide whether or not the
returns, purchases and cost
company is being managed
well under their supervision, reports
and check what needs to be All types of financial
improved on statements, audited
Employee and Trade Unions Evaluate the employment statements, income tax
conditions and earning returns, purchases and cost
capacity of the company, and reports
decides whether or not to stay
in the company based on their Financial statements
assessment of the company’s (especially income
stability and growth statement and balance
sheet, and cash flow),
income tax returns,
purchases and cost reports

B. External Users - External users are individuals and organizations outside a company who
want financial information about the company. These users are not directly involved in
managing and operating the business.
 Potential Investors use accounting information to make decisions to buy shares of
a company.
 Creditors (such as suppliers and bankers) use accounting information to evaluate
the risks of granting credit or lending money. for determining the credit worthiness
of an organization. Terms of credit are set by creditors according to the assessment
of their customers' financial health. Creditors include suppliers as well as lenders
of finance such as banks.
 Tax Authorities (BIR) for determining the credibility of the tax returns filed on
behalf of a company. Investors: for analyzing the feasibility of investing in a
company. Investors want to make sure they can earn a reasonable return on their
investment before they commit any financial resources to a company
 Customers for assessing the financial position of its suppliers which is necessary
for them to maintain a stable source of supply in the long term
 Regulatory Authorities (SEC and DOLE) for ensuring that a company's disclosure
of accounting information is in accordance with the rules and regulations set in
order to protect the interests of the stakeholders who rely on such information in
forming their decisions
 Category Decisions to Make Information Needed
Financial statements
(especially income
Approve, grant, or decline
Creditors, Lenders statement and balance
loans to business owners
sheet) and income tax
returns
Decide whether or not to invest Financial statements (most
Investors
and/or buy shares of a company likely all types)

Financial statements
Assess the tax liabilities of the (especially income
Government
company statement and balance
sheet)
Check if the company complies
with or violates the set rules Financial statements (most
Regulatory Agencies
and regulations to protect its likely all types)
stakeholders
Determine how long
customers/ consumers can
depend on the business for its Financial statements
Customers and products and services and if (especially income
Consumers they are rightfully charged with statement and balance
the appropriate fees in sheet)
exchange of the products or
services they receive
Assess the strategies used by
the business īn contending with
Financial statements (most
Competitors its competitors and the
likely all types)
financial status of the business
compared to its competitors
Determine the changes to be
Lawmakers and made on existing laws to attain Financial statements (most
economic planners economic stability and likely all types)
improvement

Adjusting Entries
Nature of the Accounting Process
o The accounting period concept requires that revenues and expenses be reported in the
proper period.
o Under the accrual basis of accounting, revenues are reported on the income statement in
the period in which they are earned.
o The accounting concept supporting the reporting of revenues when they are earned
regardless of when cash is received is called the revenue recognition concept.
 o The accounting concept supporting reporting revenues and related expenses in the same
period is called the matching concept, or matching principle.
o Under the cash basis of accounting, revenues and expenses are reported on the income
statement in the period in which cash is received or paid.
o The analysis and updating of accounts at the end of the period before the financial
statements are prepared is called the adjusting process.
o The journal entries that bring the accounts up to date at the end of the accounting period
are called adjusting entries.
Types of Accounts Requiring Adjustments
1. Prepaid Expenses - are the advance payment of future expenses and are recorded as assets
when cash is paid.
2. Unearned Revenues - are the advance receipt of future revenues and are recorded as
liabilities when cash is received.
3. Accrued Revenues - are unrecorded revenues that have been earned and for which cash
has yet to be received.
4. Accrued Expenses - are unrecorded expenses that have been incurred and for which cash
has yet to be paid.
Depreciation Expense
o Fixed assets, or plant assets, are physical resources that are owned and used by a business
and are permanent or have a long life.
o As time passes, a fixed asset loses its ability to provide useful services. This decrease in
usefulness is called depreciation.
o All fixed assets, except land, lose their usefulness and, thus, are said to depreciate.
o As a fixed asset depreciates, a portion of its cost should be recorded as an expense. This
periodic expense is called depreciation expense.
o The fixed asset account is not decreased (credited) when making the related adjusting entry.
This is because both the original cost of a fixed asset and the depreciation recorded since
its purchase are reported on the balance sheet. Instead, an account entitled Accumulated
Depreciation is increased (credited).
o Accumulated depreciation accounts are called contra accounts, or contra asset accounts.
o The difference between the original cost and the balance in the accumulated depreciation
is called the book value of the asset (or net book value).
Adjusted Trial Balance - The purpose of the adjusted trial balance is to verify the equality of the
total debit and credit balances before the financial statements are prepared.
Introduction to Accounting
Accounting is regarded both as an art and a science. It is an art because it entails creative skills,
intelligence, and professional judgment. It is also considered as a science because it is a body of
knowledge systematically gathered, classified, and organized.
Accounting as an Art
Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are, in part at least of financial character, and
interpreting the results thereof.
- American Institute of Certified Public Accountants (AICPA)
Accounting as a Science
Accounting is a system that measures business activities, processes given information into reports,
and communicates findings to decision makers. It is also defined as an information system that
measures, processes and communicates information, which are primarily financial in nature, about
an identifiable entity for the purpose of making economic decisions.
- Philippine Institute of Certified Public Accountants (PICPA)
Accounting vs Bookkeeping
Accounting is the art of analyzing, recording, summarizing, reporting, reviewing, and interpreting
financial statements while Bookkeeping is the process of recording and classifying business
financial transactions. To explain further, bookkeeping is only up to the classifying phase of
accounting. The accountant may still perform the bookkeeper’s tasks but it is his/ her job to
summarize the financial transactions, prepare the financial reports, analyze and interpret the
financial information to help users make economic and financial decisions.
Nature of Accounting
Accounting is a service activity. Accounting provides assistance to decision makers by providing
them financial reports that will guide them in coming up with sound decisions.
Accounting is a process. A process refers to the method of performing any specific job step by
step according to the objectives or targets. Accounting is identified as a process, as it performs the
specific task of collecting, processing and communicating financial information.
The Accounting Cycle
 2. Recording

1. Analyzing 3. Classifying

6. Interpreting 4. Summarizing

5. Reporting

Accounting is both an art and a discipline. Accounting is the art of recording, classifying,
summarizing and finalizing financial data. The word ‘art’ refers to the way something is
performed. It is behavioral knowledge involving a certain creativity and skill to help us attain some
specific objectives. Accounting is a systematic method consisting of definite techniques and its
proper application requires skill and expertise. So by nature, accounting is an art. And because it
follows certain standards and professional ethics, it is also a discipline.
Accounting deals with financial information and transactions. Accounting records financial
transactions and data, classifies these and finalizes the results given for a specified period of time,
as needed by the users. At every stage, from start to finish, accounting deals with financial
information and financial information only. It does not deal with non-monetary or non-financial
aspects of such information.
Accounting is an information system. Accounting is recognized and characterized as a storehouse
of information. As a service function, it collects processes and communicates financial information
of any entity. This discipline of knowledge has evolved to meet the need for financial information
as required by various interested groups.
FUNCTIONS OF ACCOUNTING
Accounting is considered as the language of business. Accounting is the means by which business
information is communicated to business owners and stakeholders. The role of accounting in
business is to provide information for managers and owners to use in operating the business. In
addition, accounting information allows business owners to assess the efficiency and
effectiveness of their business operations. Prepared accounting reports can be compared with
industry standards or to a leading competitor to determine how the business is doing. Business
owners may also use historical financial accounting statements to create trends for analyzing and
forecasting future sales.
Accounting helps the users of these financial reports to see the true picture of the business in
financial terms. In order for a business to survive, it is important that a business owner or manager
be well-informed.
HISTORY OF ACCOUNTING
It is an old discipline that dates back to thousands of years and originates from the early ancient
civilizations. Scribes in ancient Egypt were known to keep thorough records of the inventory of
goods for the pharaoh. Below is the evolution of accounting:

 The Cradle of Civilization. Around 3600 B.C., record-keeping was already common from
Mesopotamia, China and India to Central and South America. The oldest evidence of this
practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at
the time such as listing of accounts receivable and accounts payable.
 14th Century - Double-Entry Bookkeeping. The most important event in accounting
history is generally considered to be the dissemination of double entry bookkeeping by Luca
 Pacioli (‘The Father of Accounting’) in 14th century Italy. Pacioli was much revered in his
day, and was a friend and contemporary of Leonardo da Vinci. The Italians of the 14th to
16th centuries are widely acknowledged as the fathers of modern accounting and were the
first to commonly use Arabic numerals, rather than Roman, for tracking business accounts.
Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a
detailed chapter on double-entry bookkeeping. The book introduced the double-entry
bookkeeping and is the basis of the system of debits and credits in journals and ledgers used
in today’s accounting system. Pacioli also published the De Computis et Scripturis (Of
Reckonings and Writings) which covered commerce-related concepts aside from double-
entry bookkeeping.
 French Revolution (1700s). The thorough study of accounting and development of
accounting theory began during this period. Social upheavals affecting government,
finances, laws, customs and business had greatly influenced the development of
accounting.
 Industrial Revolution (1760 – 1830) – prompted the need for a more advanced accounting
system. Mass production and the great importance of fixed assets were given attention
during this period.
 19th Century – The Beginnings of Modern Accounting in Europe and America.
The modern, formal accounting profession emerged in Scotland in 1854 when Queen
Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating
the profession of the Chartered Accountant (CA).
 In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to audit
British investments. Some of these accountants stayed in the U.S., setting up accounting
practices and becoming the origins of several U.S. accounting firms.
 The first national U.S. accounting society was set up in 1887. The American Association of
Public Accountants was the forerunner to the current American Institute of Certified Public
Accountants (AICPA). In this period rapid changes in accounting practice and reports were
made. Accounting standards to be observed by accounting professionals were promulgated.
Notable practices such as mergers, acquisitions and growth of multinational corporations
were developed. A merger is when one company takes over all the operations of another
business entity resulting in the dissolution of another business. Businesses expanded by
acquiring other companies. These types of transactions have challenged accounting
professionals to develop new standards that will address accounting issues related to these
business combinations.
 1896. The first standardized test for accountants was given granting license to the first
American CPA
 Philippines (1923). Act No. 3105 entitled “An Act Regulating the Practice of Public
Accounting; Creating the Board of Accountancy; Providing for Examination, for the
Granting of Certificates, and the Registration of Certified Public Accountants; for the
Suspension and Revocation of Certificates; and for Other Purposes”. Act No. 3105 had
been amended several times to adapt to the increasing complexity of accounting as a
profession.
  2004 (RA No. 9298). The Professional Regulatory Board of Accountancy, under the
supervision and administrative control of the PRC serves its mandate to supervise, control,
and regulate the practice of accountancy in the country.
 1973. PRC accredited PICPA as the bona fide professional organization of CPAs in the
country. The number of CPAs has increased overtime – from 43 registered public
accountants in 1923 to about 200,000 CPAs today.
 The Present - The Development of Modern Accounting Standards and Commerce.
The accounting profession in the 20th century developed around state requirements for
financial statement audits. Beyond the industry's self-regulation, the government also sets
accounting standards, through laws and agencies such as the Securities and Exchange
Commission (SEC). As economies worldwide continued to globalize, accounting regulatory
bodies required accounting practitioners to observe. International Accounting Standards.
This is to assure transparency and reliability, and to obtain greater confidence on accounting
information used by global investors The trend now for accounting professionals is to
observe one single set of global accounting standards in order to have greater transparency
and comparability of financial data across borders.
Four financial statements
 Income statement
 Changes in equity
 Balance sheet
 Cash flow
Five major types of accounts
Assets Debit Permanent
Expenses Debit Nominal/Temporary
Liabilities Credit Permanent
Equity Credit Permanent
Revenue Credit Nominal/Temporary
Withdrawals Debit Nominal/Temporary

 Permanent – The balance cannot be zeroed which has ending or beginning balances
 Temporary – Needs to be zero out, close the accounts
 Income is classified into two: Revenue (service) and Sales (merchandising)
Assets
 Current Assets – useful, collected, and abused on a period of one year
1. Cash – on hand or in banks
2. Accounts Receivable – debts of the customers
3. Notes receivable – Example: Amount of 10k for the service you rendered
but the customer gives you a promissory note
4. Inventories – for merchandising business, ex. Supplies are counted and put
as inventories (Ending inventories and beginning inventories)
 5. Supplies – ex. When you buy supplies isn’t it an expense? If the statement
is “Purchase supplies” it is an asset not an expense, it can only be an expense
at the end of the accounting period in the adjusting entry. The supplies you
first buy are used, at the end, these supplies decrease, so you put what’s left
on the inventory and the remaining is deducted on the whole amount and
the difference is the supplies expense.
6. Prepaid expenses – Treated as an asset in the beginning period. Ex.
Insurance and rent, in rent, you paid for the whole year but it is not rent
expense, it is a prepaid rent, but at the end of the whole year, you adjust the
entry and is not considered as rent expense. Ex. Insurance, one-year policy
is paid fully but it is still an asset in the beginning – you acquire insurance
asset, but the expired portion is then adjusted into insurance expense.
7. Accrued Income – earned but not yet collected. Accrual (rendered service
before they pay) vs. Deferral (they pay before the service; it is still unearned
because you have not yet done your service)
8. Short-term investment – for a period of one year only
 Noncurrent Assets – used, collected, abused for more than one year
1. Property, Plant, and equipment (PPE) – when you put up a building, you
utilize this for more than one year. It can depreciate (its value), because it
has been used and abused
2. Long-term investment – copy right can be enforced for many years
3. Intangible assets
 Tangible Assets – property, machineries, land, buildings
 Intangible Assets – copy right (for literary works), patent, trademark (name of your
business), royalties (ex. Every purchase of the customer, you gain royalties)
Liabilities
 Current Liabilities - Liabilities that will be due within a short time (usually one year or
less) and that are to be paid out of current assets are called current liabilities.
1. Accounts payable
2. Notes payable
3. Accrued expenses
4. Unearned Income
5. Unearned fees
6. Wages payable
7. Interest payable
 Non-current Liabilities
1. Loans payable
2. Mortgage payable
 Long-term Liabilities - Liabilities not due for a long time (usually more than one
year) are called long-term liabilities.
1. Long term notes payable
2. Mortgage Payable
3. Bond payable
Owner’s Equity - Owner’s equity is the owner’s right to the assets of the business. Owner’s equity
is added to the total liabilities, and this combined total must be equal to the total assets.
Types of Business According activities
 Service
 Merchandising
 Manufacturing
 Hybrid business (combination of the 3)
What is the main purpose of accounting?
To gather information to make economic decisions. To provide quantitative financial information
about economic entities that is intended to be useful in making economic decisions. Accounting is
considered as the language of business.
Types of Business Activities
1. Service Business – you render service in exchange for money Ex. Accountant does
bookkeeping job and then is paid for the work done = termed service revenue. This type of
business offers professional skills, advice and consultations.
Ex. Salon, Accounting firm, law firm, and etc. Paying for professional fee. Mall is a hybrid
business that offers different types of businesses
2. Merchandising – This type of business buys at wholesale and later sells the products at
retail.
3. Manufacturing Business – This type. Using raw materials to create a product through
labor. Ex. Factories, manufacturing factories, bakery
4. Hybrid Business – combination of 3 types of business activities. Ex. A mall or an airport,
cellphone store offers service and merchandise (some of them)

Accounting Cycle for Service

Flow of Accounting Information
End-of-Period Spreadsheet (Worksheet)
Account balances are listed in the Unadjusted Trial Balance column using the ending balances
found in the general ledger.
Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Accounts Debit Credit Debit Credit Debit Credit
Adjustments are entered here. Two possibilities:
 Deferrals – Existing balances are changed
 Accruals – New information is entered
Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Accounts Debit Credit Debit Credit Debit Credit

Adjustments are combined with the unadjusted trial balance amounts. Account balances are now
adjusted.
Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Accounts Debit Credit Debit Credit Debit Credit

Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income
Statement column.
Adjusted Trial Balance Income Statement Balance Sheet
Accounts Debit Credit Debit Credit Debit Credit

Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are
extended to the Balance Sheet column
Adjusted Trial Balance Income Statement Balance Sheet
Accounts Debit Credit Debit Credit Debit Credit

Preparing Closing Entries

Closing Entries
 Accounts that are relatively permanent from year to year are called permanent accounts
or real accounts. These accounts are carried forward from year to year.
 Accounts that report amounts for only one period are called temporary accounts or
nominal accounts. Temporary accounts are not carried forward because they relate to only
one period.
  To report amounts for only one period, temporary accounts should have zero balances at
the beginning of the next period.
 To achieve this, the revenue and expense account balances are transferred to Income
Summary at the end of the period.
 The balance of Income Summary (net income or net loss) is then transferred to the owner’s
capital account.
 The balance of the owner’s drawing account is also transferred to the owner’s capital
account.
 The entries that transfer these balances are called closing entries.

 Income Summary is a temporary account that is only used during the closing process.
 At the end of the closing process, the Income Summary account will have a zero balance.
 Income Summary is sometimes called a clearing account.

Post-closing Trial Balance

A post-closing trial balance is prepared after the closing entries have been posted. The purpose of
the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning
of the next period.
Describing the Accounting Cycle
The accounting process that begins with analyzing and journalizing transactions and ends with
preparing the accounting records for the next period’s transactions is called the accounting cycle.
There are ten steps in the accounting cycle.
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and analyzed.
 5. An optional end-of-period spreadsheet (work sheet) is prepared.
6. Adjusting entries are journalized and posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to the ledger.
10. A post-closing trial balance is prepared.

Accounting Period
The annual accounting period adopted by a business is known as its fiscal year.
When a business adopts a fiscal year that ends when business activities have reached the lowest
point in its annual operation, such a fiscal year is also called the natural business year.